How easy is it to rent out current house and buy a new one?

bclark

Now this may be a stupid question so apologies but we would like to buy a new bigger house and in an ideal world would be interested in renting out our existing one rather than selling it. Whilst I like the idea I have no idea about how this would really work in practice and what the pitfalls are.

Essentially our existing home has been valued at £265,000 by two estate agents but we have been told that in reality we would probably get £250,000 due to the stamp duty threshold. When we got the house valued for sale the estate agent of one of them told us that we could get about £1000 a calender month in rent.

We have a mortgage outstanding of £129,000 so equity of £121,000. The House we are interested in is a new build listed at £335,000 so we would hope to get it for nearer £315,000.

Would we be able to release some of the equity in our current house and then get a new mortgage on the new one with the rental income covering our old mortgage? Would we have to get a buy to let mortgage on the existing one?

I have always wondered how people do this so would just be interested if anyone has any words of wisdom?

Werdnal

Firstly, any mortgage on the rental property would either need Consent to let from lender, or be BTL from the start. Some will give CTL on existing policies, some add extra costs and clauses, some refuse. Insurance on the rental would also need to be landlord based, as residential policies are not valid.

You will need to read, learn and inwardly digest everything about becoming a LL, and understand all the legal requirements of tenancy agreements, vetting tenants, deposit protection, repair and maintenance obligations, eviction processes etc. You also need to register for tax and declare your income. How would you manage the mortgage payments if tenant defaulted on rent? You need to keep a cash contingency for unexpected repairs, costs and lost rent.

You cannot offset the mortgage on a second property against your rental income, but you can offset the interest on the mortgage on the rental for tax.

DannyboyMidlands

£12k per yer rental income is only a 4.8% gross yield. Which is crap.

bclark

DannyboyMidlands wrote: »

£12k per yer rental income is only a 4.8% gross yield. Which is crap.

Well I don't know about that, my investment in the property would be £129k so £12k a year return on that investment isn't too bad is it?

GDB2222

DannyboyMidlands wrote: »

£12k per yer rental income is only a 4.8% gross yield. Which is crap.

Put more elegantly, by not selling the house for £250k, you'll end up with £250k more debt, and £12k rent won't service that at B2L interest rates.

Furthermore, the £12k assumes there are no void periods whereas the average rental property is empty about 4-6 weeks a year. Out of the rent you'll have to pay agent's fees (another 4-6 weeks of rent gone), maintenance, insurance.

As a rough rule of thumb, you should budget on getting 8 to 9 months rent a year to pay towards the mortgage, and it's obvious that the rent won't come near to covering the mortgage. As Danny says, the rental yield is, ahem, far too low.

GDB2222

bclark wrote: »

Well I don't know about that, my ionvestment in the property would be £129k so £12k a year return on that investment isn't too bad is it?

Nope, overall you'll have £250k more borrowing, taking the old and new houses together.

kingstreet

The most you'll get on the BTL remortgage is 75% of the value of the property. Take that at £250k and you're talking £187,500. After repaying your existing mortgage and some fees, you'll have around £55k deposit for the new one.

£187.5k at 5% pa is £781 per month interest only. Most lenders want rent to exceed interest by 25%, so the rental income has to be £976pm.

Now your purchase. At £315k, £55k deposit means a mortgage of £260k assuming you have savings to cover the stamp duty and other costs.

As the others have pointed out, the yield is quite low for what you are doing and the lack of a tenant is going to leave you needing to pay both mortgages for a period. Is that feasible, or sensible in your position?

abankerbutnotafatcat

Not all properties stack up equally for rental investment potential. On current value my rental property works out as a 6.4% yield which is why I kept it when I moved. However, where I moved to, although a much nicer property would have rental profile very similar to your own so I would probably sell it.

I did what you have described, got a CTL from my mortgage provider (the rate didn't go up) got additional borrowing up to 75% LTV on that property (with them ascertaining that rental income was sufficient to cover interest) and used that to part-purchase my new place with the remaining funds obtained from a mortgage against my income (plus quite a bit of cash!!)